Embedded finance can bring banks deposits, fee income and assets generated through somebody else’s distribution. Earnings results showed banks don’t all want the same mix.
Fifth Third is growing deposits and fees through Newline. FinTech partnerships generate nearly all The Bancorp’s deposits, although the bank moves some deposits to other institutions. First Internet Bank is increasing banking-as-a-service (BaaS) fee revenue while moving billions of dollars of FinTech deposits off its balance sheet. FV Bank’s new managed account offering addresses another part of the business, putting customer accounts and specified compliance functions at the bank while its FinTech and payment partners retain the customer-facing product.
The strategies show how BaaS is being used for different purposes by the banks behind it.
BaaS generally refers to arrangements in which a regulated bank supplies banking products or services that a nonbank distributes through its own product or interface. Depending on the arrangement, other companies can provide technology and perform functions including account recordkeeping, payments processing and compliance.
Fifth Third’s second-quarter earnings results showed one version of the economics. Newline deposits increased $2.1 billion, and fee revenue rose 35% year over year. The disclosure makes Newline unusual among the current examples because Fifth Third is getting growth from both sides of the relationship, including deposits that can fund the bank and fees generated by the embedded finance business.
The Bancorp has built more of its funding base around FinTech relationships. In its second-quarter earnings results, the bank reported average deposits of $8.41 billion, up 4.4% from a year earlier, with the increase primarily driven by FinTech relationships. FinTech fees reached $40.9 million, up from $35.6 million a year earlier. FinTech fees represented 25% of total revenue during the quarter.
FinTech partnerships generate 96% of The Bancorp’s total deposits. Separately, the bank reported $1.12 billion of off-balance-sheet deposits as of June 30, consisting of deposits swept to other financial institutions to manage its balance sheet composition and deposit portfolio diversity.
FinTech Deposits Don’t Have to Stay Put
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First Internet is showing that BaaS growth doesn’t require every FinTech deposit to remain on its balance sheet.
The bank’s second-quarter earnings results showed BaaS fee revenue increased 172% year over year as it selectively added FinTech partners and expanded existing relationships. At the same time, approximately $2.4 billion of FinTech deposits moved off its balance sheet into a deposit network, which the bank said gave it flexibility to manage the size of its balance sheet.
FV Bank’s Aug. 26 launch of Global Managed Accounts approaches BaaS strategy from the operating side. Eligible FinTechs and payment platforms can offer accounts held directly at FV Bank through their own products. FV Bank said it handles account provisioning, know your customer (KYC) and know your business (KYB) onboarding, transaction monitoring and ongoing account reviews, while the partner retains its interface and customer experience.
These operating decisions have regulatory consequences.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency described the risks in their joint statement on banks’ arrangements with third parties to deliver deposit products. The agencies said third parties may maintain deposit and transaction systems of record, process payments, perform compliance functions, service accounts and provide the applications customers use.
The agencies didn’t prohibit these arrangements or establish new supervisory expectations. They identified circumstances that can increase risk, including fragmented operations, inadequate bank access to deposit and transaction records and reliance on third parties to perform compliance functions. Banks remain responsible for compliance with applicable laws and regulations when third parties perform functions on their behalf.
Verification adds to the amount of information that may need to move among the parties.
The March PYMNTS Intelligence report “Identity at Scale: Where KYC/KYB Touchpoints Create (or Contain) Agent Risk” surveyed 350 companies and found that businesses use digital identity verification across 4.4 workflows on average. Customer login was the most common at 79.4%, followed by online transactions at 74.6%, fraud tracking at 70.6%, and account opening at 67.7%.
The research wasn’t BaaS-specific, but it showed how much identity activity now occurs after onboarding. For banks operating embedded finance programs, that makes customer and transaction information an ongoing issue rather than something resolved when the account opens. The federal banking agencies specifically identify customer identification, customer due diligence, suspicious activity monitoring and sanctions compliance among functions that third parties may perform.
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